Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages

Because “the equilibrium price” has always been a fable.

> This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.

Inflation is caused by rising prices. In the b2c markets, the prices at set by the companies. It is believed that in presence of sufficient competition, the companies aren't really free to set the price, and are only following the “market price” (they are said to be “price-takers”).

Here we see profit rising, which means that the competition isn't high enough, companies have become “price setters”, and they are setting the rising price. Hence they and their profits are responsible for inflation. QED.

I love how one can make an example (gold coin) to illustrate an issue (debasement) to receive a long lesson about the example being incorrect instead of discussing the issue. I never said "gold is the solution", and in fact my example is about how governments historically debased gold coins.

An egyptian government can also "debase" grain. Just issue fake receipts for unexistent grain, and buy things with them at current prices. Suddenly, there are a lot of grain receipts circulating, so you expect prices to rise. The government can now blame the price rise to the merchants! They are the ones that are rising the prices, and that's all you can see.

On the example of the grain deflation, you don't have a "receipt in gold". You buy or sell grain, and that's it. Lets suppose a simple market that stores grain at a cost of 10% in a year. You sell grain on January for 100 ounces of gold, but if you try to re-buy the same amount of grain in December, it costs 110 ounces, or receive a 10% less grain for 100 ounces. As simple as that. Your 100 ounces of January didn't guarantee you the same amount of grain in December, because they are not a "receipt in gold for X amount of grain". Prices are a dynamic way of economic coordination to reflect whatever reality it may come. E.g. if half the silos burn through the year, grain prices will double to reflect that, and that's not inflation. But good luck reclaiming your clay receipt amount of grain.

The problem here is not the gold. The problem is issuing more money than people are demanding. There is nothing wrong with issuing money (e.g. in form of new credit) if people demands credit that they are paying sooner or later. The problem is the government creating new money with zero intention of paying it back, because that fuels inflation.

Deflation is not bad _per se_. We have deflation in computer or mobiles prices since forever: we know we can buy a cheaper computer in the future with the same specs than today, yet we don't hoard money instead of buying computers. We buy them when we really need them. Inflation creates an artificial urge to spend sooner than you want/need, because we know our today money won't buy the same in the future but less. That looks like a good thing on the surface ("the economy moves" they say), but it has a lot of bad consequences: erodes savings, consumption rises above our real needs, investment is more difficult because economic calculations are uncertain.

Historic inflations are well explained here: https://www.amazon.com/Forty-Centuries-Wage-Price-Controls/d..., where the authors collect a large number of inflation events in the last 4,000 years and show how every single government followed the same route: 1) debase the money, 2) expend their newly created money, 3) prices raise, 4) people complain, 5) government blames the merchants and creates laws to control prices and punish price raises 6) inflation persists.

Well ... if you think about it the additional spending power was sitting somewhere right? People lost their jobs because other people weren't spending. The people who didn't spend, kept their money. Then the people who laid off workers, kept their money. The government added money to close the spending gap. It's a perfectly reasonable policy, HOWEVER I know that in Australia definitely (and probably in the US) it was very poorly allocated, so people and firms who really shouldn't have had any extra income were granted it and some others who really needed it, didn't get it.

On balance, increased government spending adds net financial assets to the private sector and increased taxation removes it.

So did the government need to just "tax back" the money it spent into the economy? Maybe in some ways, but certainly not from the people it gave it to and maybe not at all. BECAUSE during the time when there was a recession avoided by stimulus, the population also grew so there should have been some economic growth during that time anyway.

As such, probably, what should have happened is that the government should have done things to ensure that the (very few) parts of the economy that benefit wildly from lack of competition and dysfunctional markets (like food, energy and housing) didn't accumulate all of the growth that should have been more evenly spread around.

In Australia, we need the government to build roughly 100,000 public houses per year, and we need to dramatically increase net migration to achieve that; but since we're an economy dominated by religion, mining, finance, real estate and insurance that's unlikely to happen. We actually have a horrible housing crisis in this country because of the dramatic increase in single person households as a result of relationship breakdowns over covid and the tendency away from share housing in young people (who can afford it!), as well as an explosion in dwellings used only as short term rentals.

In the US you probably have many of the same problems. The inflation reduction act did some of the work to improve things but it took a while to get it through because Manchin and Sinema fucked the recovery for everyone (as Bernie said: "give us more democrats").

This is the best discussion on inflation I've seen:

https://www.levyinstitute.org/publications/is-it-time-for-ra...